|Baltic Dry Index: The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
|Ted Spread: The TED spread is a gap between two interest rates, which is used as a marker of the financial strength of banks.The TED, or Treasury Eurodollar, spread is calculated by subtracting the interest rate on treasury bills from the three-month dollar LIBOR:The treasury bill rate is the interest rate paid by the U.S. treasury – often used to represent “risk-free” lending (on the assumption that U.S. government is always good for it), while the LIBOR is the rate at which banks lend to each other. Therefore, the difference in the two rates represents the “risk premium” of lending to a bank instead of to the U.S. government. At its lowest, the TED spread can be as low as 20 basis points, as it was in early 2007. A TED spread this low occurs when banks are seen as strong and in good financial health; the risk of default or banktruptcy is low, and therefore other banks are willing to lend them money at nearly the risk-free interest rates paid by the U.S. government. By contrast, the Ted spread stood at 330 basis points in early October 2008, after a series of bankruptcies by banks and other financial insitutions that occured as part of the 2008 Financial Crisis. On October 10th, the TED spread hit a new record of 460 basis points, reflecting a breakdown in interbank lending.
|CRB Index: The Reuters-CRB Index (CCI) was originally designed to provide dynamic representation of broad trends in overall commodity prices. In order to ensure that it continued to fulfill that role, its components and formula have been periodically adjusted to reflect changes in market structure and activity. Since 1957, there have been ten revisions to Index components. The first was on April 3, 1961, and the latest in 2005.
In the original calculation, all future deliveries up to a year ahead were averaged to calculate the current price. In 1987, the calculation was changed to only include deliveries nine months forward. In 1989, all non-cycle months were excluded from the calculation. The 1995 revision lowers the number of forward deliveries included to those within six months of the current date, up to a maximum of five delivery months per commodity. However, a minimum of two delivery months must be used to calculate the current price, even if the second contract is outside of the six month window.
There has also been a continuous adjustment of the individual components used in calculating the Index since the original 28 were chosen in 1957. All of these changes have been part of the continuing effort of Reuters (CRB) to keep the Reuters-CRB Index (CCI) “current,” and to ensure that its value provides accurate representation of broad commodity price trends. Today, it currently is made up of 19 commodities as quoted on the NYMEX, CBOT, LME, CME and COMEX exchanges. These are sorted into 4 groups, each with different weightings. These groups are petroleum based products, which based on their importance to global trade, always make up 33% of the weightings; and 3 further group of liquid assets, highly liquid assets and diverse commodities.
The 19 commodities are: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas, Wheat.The tenth revision of the index also renamed it the Reuters-Jefferies CRB Index, or RJ/CRB.
|LIBORLIBOR, or the London Interbank Offered Rate, is the average interest rate between banks in the London interbank market. LIBOR is a widely used short-term interest rate benchmark, since it is designed to reflect the cost of borrowing between some of the world’s largest, most reputable banks.
Every business day at just after 11:00 am London time, the British Bankers’ Association, in conjunction with Reuters, releases new rates for each combination of these. For example, there’s a new 3-month LIBOR for the yen, overnight LIBOR for the euro, and 2-week LIBOR for the pound released daily. These rates indicate both the health of the currencies (and their respective economies) relative to one another and expectations about future economic conditions.
There are ten LIBOR panels, one for each of the ten currencies for which the rate is determined. Each panel is composed of at least eight contributor banks, chosen for their reputations and their perceived expertise in a given currency. The BBA takes the daily deposit rates reported by its designated contributor banks and calculates the mean of the middle 50%; the resulting number is the LIBOR for the currency in question. The average rates at which these banks say they would lend to one another is taken as an indication of the health of the banking systems of the ten LIBOR currencies. A list of the panels and their members as of May 30, 2008, can be found here on the British Bankers’ Association’s website.
Not only does LIBOR provide information about the cost of borrowing in different currencies, it actually influences it. LIBOR is used as the basis for other interest rates across the globe. IE, variable interest rate loans such as mortgages and car loans will often be quotes at LIBOR + a percentage. For example, a loan that was LIBOR + 5% would charge 10% interest when the LIBOR is 5%, and 7% when the LIBOR is 2%.
Estimates for the total value of financial products with rates tied to LIBOR vary widely, from as low as $150 trillion, to $360 trillion, to as high as $500 trillion.